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When Properties Seem Priced to Spur a Bidding War

If you’re in the market for a home, you may want to consider some advice from academics before sealing the deal. Research papers on the subject of negotiation offer numerous tips to help potential home buyers better navigate the home-buying process, as I recently learned when I wrote a paper for my business school negotiation class on the subject. This post is part of a series on some of the findings that I thought were worth sharing. These are my earlier posts: “The True Value of a Home to a Seller,” “Keeping Your Top House Price to Yourself” and “Why to Know What a Home Seller Paid.”

Despite the housing market slump, homes in some areas of the country are still selling above listing prices. In the Noe Valley area of San Francisco, where I live, for instance, a number of homes that seemed to be priced low ended up receiving multiple bids and selling for thousands of dollars over the asking price.

Academic papers on the topic of negotiation help explain why this phenomenon occurs and why those in the market for a home may want to stay away from properties offered at below-market prices, where multiple bids are being accepted.

In a paper, “Starting Low but Ending High: A Reversal of the Anchoring Effect in Auctions,” published in The Journal of Personality and Social Psychology in 2006, researchers identified three probable reasons that low list prices in many markets, including the Bay Area, resulted in high sales prices despite the fact that real estate agents are known to be anchored by list prices.

First, the researchers found, low list prices mean lower barriers to entry and thus, more bidders, more bids and a higher probability of a higher sales price. Second, the researchers concluded, the investment of time and energy in early bids acted as sunk costs for the early bidders. That, in turn, encouraged them to escalate their commitment and continue bidding, pushing the final price higher.

Finally, they concluded that a high number of bids would attract those who assess an item’s value by its number of bids. They will then bid themselves, pushing the price even higher.

“Lower starting prices can lead to higher final prices by increasing traffic (i.e. increased entry and more participation), which conveys value, and by creating sunk costs for early bidders,” the researchers wrote.

What does this mean for home buyers? A second paper, “To Start Low or To Start High? The Case of Auctions Versus Negotiations,” published last year in Current Directions in Psychological Science, suggests that potential home buyers should skip bidding on homes that seem to be priced low to stimulate demand and high bids. And if potential buyers do decide to bid on such homes, the paper says, they shouldn’t bid more than they truly believe to be the value of the home despite the bidding activity of others.

According to the paper, experienced bidders are less likely to bid when starting prices are low. Novices can avoid getting trapped into paying too much, the paper said, by “bidding in high-starting-price auctions, learning to avoid the lure of or ignoring sunk costs, and investigating the value of an item regardless of other bidders’ activities.”

Have you participated in such bidding wars? Why or why not? Share below your experiences with making offers on homes priced to spur bidding wars.

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